When employees contribute to their pension scheme, they get tax relief on their contributions. This means that some of the employee’s pay, which would otherwise have gone to the government as tax, instead goes into their pension pot.
Tax relief on pension contributions may be given in two ways: “Net Pay” or “Relief at Source”:
Net Pay Scheme - Contributions are deducted from the employee’s gross salary (i.e. before tax has been deducted). This means that the employee automatically receives tax relief at his or her highest rate of income tax.
Relief at Source Scheme - Contributions are deducted from the employee’s net salary (i.e. after tax has been deducted). However, the employer deducts only 80% of the total contribution from the employee’s salary; the scheme then adds the basic rate tax relief amount (20%), which is claimed from HMRC by the pension provider.
Additional things to Note:
A pension scheme can only use one method for all members and this affects lower or higher paid staff in different ways:
- Employees who don't pay income tax only get the government top-up in relief at source schemes. If the scheme was on net pay, these employees won’t get tax relief and will have to pay 20% more for their pension.
Higher and additional rate taxpayers only get their full tax relief “up front” in a net pay scheme. If the scheme is a relief at source scheme, these members get only basic rate tax relief up front and need to reclaim the balance of their full tax relief (40% for higher rate taxpayers and 45% for additional rate taxpayers) by completing a self-assessment tax return (or writing to HMRC).
You can find more information tax relief like how it impact non-eligible employees, making claims for higher rate tax payers, and the aceess to its details within our Husky App here